Monthly Archives: July 2014

Brad Wright, Our Dear Leader, wrote a wonderful piece yesterday discussing the price of health care, using designer brands as examples. This caught my eye, of course, because I am as much a sucker for a $250 wallet that says “Burberry” on it as the next guy. ( Or a $1000 pair of shoes by Manolo, or a $100 T shirt by James Perse, or… What was I saying?) In the course of research I’m doing for a project on the career choice between nursing and medicine I have done some reading on how we make choices in general. One of these books, Predictably Irrational, by Dan Ariely, has a chapter titled “The Power of Price” which discusses some of the same issues Dr. Wright wrote about. So, with Brad’s permission, I’d like to examine the psychological impact of price a little further.

Let’s start with placebos, as Mr. Ariely does. When I was a new nurse I had an elderly patient who refused to go to sleep without pharmaceutical assistance. After indulging him with chloral hydrate for a couple of weeks (this was the 1990s), the deleterious side effects of giving this medication to elderly patients became apparent and his team decided to discontinue the sleeping pills. We nurses bore the brunt of this decision, as usually happens. One night, after the 16th call for sleeping pills from this gentleman, I got fed up and brought him a Tylenol. The patient took the pill and slept all night. It wasn’t the action of a specific medication that helped him sleep, but the act of taking a pill he expected to make him sleep.

Many of the financial decisions we make are based on this placebo effect, which runs on advertising, essentially. Instead of feeling better because we expect to, we pay more because we expect the more expensive option to be better. As Brad said, we expect an expensive wallet to be of better quality than a cheap one, because we equate price and quality. That this relationship does not necessarily exist has little bearing on our choices. I bought a shirt for a couple hundred bucks from The Row, and another shirt almost exactly the same from Ann Taylor Loft. Both shirts got holes in them. In the case of the expensive shirt I assumed this was what it was supposed to do – the “distressed” look, maybe. The other, cheaper shirt I assumed was just poor quality. We do the same thing with healthcare spending. If it costs a lot and has a brand name, it must be better. If the pharmacy gives a patient the generic and the medication doesn’t work, it’s because the pills themselves are no good. If the patient then gets the brand-name version of the exact same drug, there’s a good chance it will work better because she expects it to work better.

Mr. Ariely and some colleagues actually ran an experiment very much like my little attempt to help a man sleep. They gave a bunch of people a painful sensation, then gave them a drug with a fancy name that the subjects were told was an innovative new painkiller, then gave the subjects the painful stimulus again. The subjects felt less pain the second time, even though the drug was really just a vitamin C tablet. But here’s the interesting thing. When the subjects were told the painkiller was expensive, they were twice a likely to experience pain relief than if they were told the drug was cheap. As Mr Ariely says, “Price can change the experience”.

Now, in healthcare most of the time the consumer, i.e the patient, doesn’t know the price of the pill or treatment or test he’s getting. Nor does he necessarily care because he’s not paying for it. So patients use surrogate markers of price. Say I’m presented with two wallets and asked to choose one. I’m told I can get either wallet for free. One is soft brown leather with lots of pockets. The other has a lower quality leather and no pockets but has “Dior” emblazoned on it. According to Ariely’s research, and personal experience, most people will choose the Dior wallet, assuming it is of better quality. Patients do this with healthcare resources all the time. They go to Brigham and Women’s instead of Milton Hospital because Brigham is famous and has an Harvard affiliation. A patient wants an MD anesthesiologist instead of a CRNA because the person with the more expensive education must be better. Another has back pain and gets both a CT and an MRI, which makes her feel good that she’s getting such high quality care, two imaging tests being better than one. The actual quality of the care might be exactly the same, and the outcomes may be the same, but the expectations change the experience. This is why it’s so hard to cut wasteful spending.

Luxury goods are items that people purchase in disproportionately greater amounts as their income increases. That’s how economists think of them anyway. But for the average American, a luxury good means something else. We tend to think of luxury goods being things like designer clothing, luxury cars, and high-end restaurants. Our minds fill with images of Gucci, Burberry, and Luis Vuitton, or Mercedes-Benz, Porsche, and Ferrari. One thing is clear to us: items made by these manufacturers are expensive. That’s an objective fact. Another thing may seem clear to us, but it involves more of a cognitive leap: we assume that these items are of a higher quality than their non-luxury counterparts. In effect, what we are doing is making a strong association between the price and the quality of a good or service. Granted, there are good reasons to make that association to a point, because price does correlate with the materials, labor, and so forth that go into making an item. But at a certain point, high prices tend to be used as signals or markers of exclusivity rather than indications of the true worth of an item. For instance, on a recent trip to England, I contemplated purchasing a Burberry wallet as a gift for my wife. But, given the exclusive luxury pricing of the item, combined with the weak exchange rate, the wallet would have cost roughly $250. Was the wallet nicer than one I might pick up at Wal-Mart for $15? Without question. But was it nicer than one I might pick up at Dillard’s department store for $50? Highly questionable. In the final analysis, then, I’d be better off to give her the $50 wallet filled with $200 in cash. But plenty of people do buy that $250 wallet, and the question is why. The answer is that they assume that it is a higher quality item, that it is an exclusive brand, and that it will signal prestige to others, and that–through some sort of mental math–is somehow worth forking over the extra money.

Cut to health care. Does the same mentality apply? Is higher cost health care perceived as being higher quality? Is something better simply because it is more expensive? Based on the above analogy, you could answer yes, but only to a point. Beyond that, at some point, more health care spending is simply wasteful. But, how does it play out in practice? Obviously, Americans spend a lot on health care, and it really comes down to two factors: prices and utilization. We’re looking at prices here. There are a variety of reasons why prices are a tad bit wonky in the U.S., including things like third-party payers and information asymmetry, but might patient perception also be a factor? The answer, according to a study funded by the Robert Wood Johnson Foundation, is yes. Asked whether higher quality care comes at a higher cost, 48% said yes, while 37% said there was no relationship, and the other 15% didn’t know or said “it depends.” Framing the question in the negative, though, changed things. Asked whether lower quality care comes at a lower cost, only 29% said yes, while 46% said there was no relationship, and the other 25% didn’t know or said “it depends.” So, we appear to have succumbed to the idea that if you want high quality care, it’s going to cost you more, while we also seem to recognize that you can pay a lot and still receive low quality care. What this should point out to us, is that the relationship between prices and quality in health care is limited, much like it is with other goods and services. Clearly, at lower levels, incremental increases in price are likely to reflect differences in quality, just like our wallet analogy. The real question is: At what point does the additional cost simply become a meaningless signal, unrelated to additional gains in quality, and representing excessively wasteful health care spending? And, more importantly, how do we ever convince people of this?